advice from a fake consultant

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Tuesday, May 24, 2011

On Hole Cards, Or, "Drill, Baby, Drill"? Why? Is Canada Out Of Sand?

In America, today, there are three kinds of drivers: those who look at the other gas pumps down at the ol’ gas station and think: “Oh my God, I can’t believe how much that guy’s spending on gas”, those who look at their own pump down at the ol’ gas station and think: “Oh my God, I can’t believe how much I’m spending on gas” – and those who are doing both at the same time.

Naturally, this has brought the Sarah Palins of the world back out in public, and once again the mantra of “Drill, Baby, Drill” can be heard all the way from the Florida coast to the Arctic National Wildlife Refuge.

But what if those folks have it exactly backwards?

What if, in a world of depleting oil resources, the last thing you want to do is use yours up?

To put it another way: why isn’t all our oil part of the Strategic Petroleum Reserve?

Consider the inexorable logic of the Big Lie. If a man has a consuming love for cats and dedicates himself to the protection of cats, you have only to accuse him of killing and mistreating cats. Your lie will have the unmistakable ring of truth, whereas his outraged denials will reek of falsehood and evasion.

So here’s the thing: we produce a surprising amount of our own oil right here in the USA (in fact, we’re the world’s third-largest oil producer), but we don’t produce enough to cover our current use, and that’s why we import about half of the roughly 19 million barrels of oil we use daily. The vast majority of that is used in vehicles or for heating; almost none is used to generate electricity.

Our largest suppliers of oil, despite what you might think, are not all from the Middle East: instead, it’s Canada, Saudi Arabia, Mexico, Nigeria, and Venezuela, in that order.

(Perhaps you’re thinking: “Canada? Oil?” Yes. Canada and Oil. They provide us with more than twice as much as Saudi Arabia from huge “oil sand” resources, primarily in Alberta; the exploitation of those resources has created a huge environmental controversy.)

Now if you ask me, an ideal situation would be one where we decided to get out of the business of using oil altogether – and to help make my point, we have some helpful numbers from a guy that you pay every day to figure this stuff out: Mark Doms; he’s the Chief Economist for the US Department of Commerce, and, to paraphrase Little Feat, he’s always handy with a chart.

According to Doms, 60% of our 2010 trade deficit (about $265 billion) represents the cost of imported petroleum products, and if things continue through December as they did the first three months of this year, in 2011 every American, man, woman, and child, will pay a “tax” of about $1000 to import all that petroleum.

Do you know what we, individually, spend on gas? In March of this year, the average household spent just over $300 on that month’s gasoline; 5 months ago that number was $56 lower. The way it works out, every time gas goes up 10¢ a gallon, it costs the average household another $7 a month.

And that’s not all: less than half of the total cost of imported oil is paid at the pump: about 44% of imported oil is used by businesses; another 15% is used by governments across the USA, and that means almost 60% of the cost of imported petroleum is “folded into” the price of everything else.

(A quick author’s note: you’ve seen the words “oil” and “petroleum” used liberally in this story; the exact literal reality is that in each instance we should really be referring to “petroleum products”, and that’s because we import and export not just crude oil, but a variety of other petroleum products. I get tired of using the phrase “petroleum products” over and over, and I’m probably using “oil” and “petroleum” more interchangeably than I should.)

So get this: if we were out of the importing oil business, we’d save about $300 billion a year – and as it turns out, over a 10-year period we could actually convert the entire US auto fleet to electric cars powered by windmills by providing $15,000 cash “buy-outs” for today’s 135,000,000 gasoline cars and building the wind generation and “smart grid” we’d need to support the effort…and doing all that would cost…wait for it…about $250 billion a year.

If I get the math right, 20 years after we first started building windmills and subsidizing cars, everything would be paid off; and every year after that the US economy would generate a $300 billion “profit” on our investment – unless the price of a barrel of oil goes up. If it does, the amount of money coming back to our wallets every single year from then on, obviously, also goes up.

And if we were out of the “using oil for driving” business, once everything was paid off we could put almost $4000 a year (in today’s dollars) right back in the pocketbooks of every family in this country – which, if you ask me, represents a pretty good “tax cut”.

Let’s also keep in mind that any new oil drilled on our public lands might not necessarily end up in the US; that’s because even if oil companies were 100% free to “Drill, Baby, Drill” in our waters to their hearts’ content…they’d also be perfectly free to sell as much of that same oil, anywhere in the world, to whatever entity might end up being the highest bidder – and today, our friends in places like India and China are desperate to be that high bidder.

Put all of this together, and you get back to the question I posed at the top of the story: why in the world would we be in a hurry to “Drill, Baby, Drill”, when we could, instead, put all our efforts into getting out of oil, which would save us so much money that the conversion pays for itself?

Then, when oil’s running $400 a barrel or so, let’s use our oil to pay China back the trillion dollars we owe ‘em…which, at current production rates, would only take about 400 days, assuming it were possible to divert all our production for that purpose.

To state it a bit more ironically, it may be that the smartest thing we can do right now is to conserve every possible drop of oil we have…until we don’t need it any more, and it becomes a sort of Strategic Cash Reserve that can help strengthen the dollar and reduce the national debt in the years to come, both at the same time.

Or to put it another way, the next time someone tells you they want to “Drill, Baby, Drill”...you can step right up, look them square in the eye, and ask: “Why do you hate America?”